Summary
Companies achieve high valuations at the capricious, manic-depressive pleasure of the markets.
Alibaba’s FY2022Q3 results weren’t that bad, though guidance is down more sharply. This looks to be mainly a function of a macroeconomic slowdown, intense competition, and difficult 2020 pandemic comps.
Property sector fallout is a wildcard that could worsen the macroeconomic slowdown and add further to already-negative sentiment.
But the valuation has dropped enough that delisting should present less downside. With the regulatory front calming down, the risk-return trade-off looks better than previously in 2021.
The past 6 months have been a lesson in investor psychology. In the short term, how others perceive the situation is just as important as the facts themselves.
Andrew Braun/iStock Editorial via Getty Images Investment Thesis
Alibaba ( BABA )( OTCPK:BABAF ) has been caught in a perfect storm of poorly-understood Chinese regulatory actions, risk of delisting by U.S. regulators, a macroeconomic growth slowdown, a brewing property sector crisis, difficult pandemic comps, and intense competition. The relentless sell-off is also a stark lesson in investor psychology – you can try to be “smart” and reason through the facts in a balanced way, but in the short term, the market is a voting machine. Even if you’re right, others will perceive the facts in their own way, and the market price will be determined accordingly. Many investors might not discern one risk factor from another – instead, they just see a stock price that keeps going down, so they conclude that the situation is increasingly more bleak.
And yet, an evisceration of Chinese internet tech companies at the hands of the CCP, as predicted by some, doesn’t look to be in the cards – though anti-monopoly efforts could have aided the intensifying competition . FY2022Q2 revenue and earnings were 2% and ~10% below expectations – increased investment in high-growth categories, which are still unprofitable, helps to explain the latter. Worries about delisting also look less warranted at this price level – for example, Chinese telecoms with revenue growth typically around ~3% that have already been delisted trade for ~7x P/E . Alibaba trades for a FY2023 forward P/E of ~11.5x as of Wednesday’s close, and accounting for its negative leverage, this is more like ~9.7x. Overall, I’d view the risk-return trade-off as better than at any previous point in 2021. Reflecting On The Past 6+ Months of BABA’s Downward Spiral
Although I have been relatively equivocal and cautionary about risks to investing in BABA and Chinese equities, in previous articles , and leery of the short-term downside risks, ultimately, I opted to remain optimistic. A key shortcoming of my bullish conclusions, I believe, was to not fully admit the role of investor psychology, and how others might perceive the same events. Many investors are not going to try too hard to put things in perspective – this does take effort, after all – and will settle for easier narratives.
To compound this fact, new developments can change the risk-return profile, abruptly – one has to be ready to change one’s mind on a dime, or at least adjust exposure accordingly, when the evidence suggests it’s warranted. Case in point, while there are explanations, of sorts, for the education sector crackdown or DiDi’s listing/delisting debacle, the optics were not great – these events added to a climate of confusion/anxiety that already existed. VIEs, and subsequent developments, which might have otherwise been brushed off by the market, have instead been seen in a negative light.
One common narrative is that the CCP wants to hamstring major Chinese tech companies to prevent them from growing too large/powerful. Anti-monopoly measures and other regulations do present new challenges relative to a ” cowboy business culture ” which may have prevailed in previous years. But if Beijing/the CCP/regulators were planning on dismantling Alibaba, they had better get to work – the stock price is now barely above 2015 levels, but revenues are still up more than 1000%, and EBITDA, cash from operations, and net income are up roughly 4x or more. Overall, though, the regulatory front has seemed to quiet down throughout 2021H2, even as the stock price has continued to erode. Data by YCharts Two company-specific risks for Alibaba that I highlighted as warranting relatively more concern included (1) delisting by U.S. regulators, and (2) domestic competition. Recent developments have continued to validate these concerns. But some aspects of China’s country risk have only come into sharper focus since then, e.g. most recently Evergrande, the property sector’s weakness, and the […]
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